Treasury finalizes temporary “hot stock” regulations without material change

Treasury has finalized temporary regulations that address the treatment of so-called “hot stock” in spin-offs, split-ups and other transactions intended to be tax-free under Code Section 355.  Such tax-free transactions require that the parent or “distributing” corporation and the subsidiary or “controlled” corporation both have been active trades or businesses for at least five years.  “Hot stock” generally refers to stock of a controlled corporation that was acquired in a taxable transaction within the previous five years.  Before the favorable temporary regulations, such stock was generally treated as “boot” and could create taxable gain. While this problem often could be avoided through proper structuring, the rule clearly presented a significant trap for the unwary.  The temporary regulations had made it clear that most of the traps for the unwary in this area have been closed and make it unlikely that this rule will inadvertently apply to future transactions.  The final regulations adopt the substantive rules of the temporary regulations without change, but declined to expand the regulations to several situations raised by commentators on the temporary regulations.